Five Questions With: Robert Cusack

Robert Cusack is a portfolio manager at WhaleRock Point Partners, a wealth management firm based in Providence. He has 35 years of experience as an investment professional. Cusack began in his career in public finance investment banking at First Boston Corp. in New York. He has managed institutional and private client portfolios and has advised a five- star Morningstar municipal bond fund. Cusack has served as a trustee for the East Providence Police and Fire Pension Fund, as a member of East Providence City Council and is currently a member of the Rhode Island Refunding Bond Authority.

Cusack has a bachelor’s degree in economics from Fordham University and studied at the Tuck School of Business.

PBN: The Bond Buyer’s Symposium on Distressed Municipalities will be held in Providence in March. Since municipal bonds are one area of your expertise, what’s the importance of the conference being held in Rhode Island?

CUSACK: Having the conference here shows public finance in Rhode Island has gained a high profile nationally. The state has broken new ground in addressing problems like state pension reform, the Central Falls bankruptcy and the Providence budget.

PBN: Do you think this conference can have a positive impact on the financial community in Rhode Island?

CUSACK: Rhode Island ranks poorly in national surveys of business climate. This conference can bring attention to the positive steps we’ve taken. General Treasurer Raimondo will be the keynote speaker. We expect her message to be upbeat.

PBN: In terms of your investment firm, WhaleRock Point Partners, are municipal bonds included in your investment strategies? Why?

CUSACK: Yes. We emphasize preservation of capital because that’s the primary objective of our clients and because we believe it’s the most effective approach in building capital over time. We use municipal bonds to produce tax-exempt income and to reduce overall portfolio volatility. Fund managers and advisors using simple strategies with municipal bonds have produced good returns for clients in the declining interest rate environment we’ve been experiencing. We believe that’s about to change.

PBN: From the perspective of financial advisors and investment bankers, has the potential of municipal bonds decreased or improved as we look into 2013?

CUSACK: Bonds generally have been in a 30-year bull market, with interest rates trending lower and bond prices rising. We believe we are entering a period of transition from historically low rates to rates moving higher. To avoid losses, municipal bond investors must shorten average maturities of portfolios at the same time they look much more carefully at credit quality. That’s because many states face budget deficits and large unfunded pension liabilities in a slow growth national economy, and credit quality is deteriorating. The easy gains in munis are over, and when rates eventually rise, investors in mutual funds and longer-dated individual bonds will see losses in market value that will likely be shocking. If rates rise one percent on a 10-year bond, its value drops nine percent. On the credit side, only four percent of new munis are insured today, vs. 60 percent before the crisis. So now, as Puerto Rico’s bonds face greater distress, their prices are dropping and are affecting the value of the great many bond mutual funds holding them. Another threat is potential federal legislation affecting the tax exemption of municipals. That bears close watching.

PBN: Can you elaborate a bit more on how the market is approaching bonds from distressed communities, both in the secondary and primary markets?

CUSACK: Since the crisis in 2008, rating agencies have been more proactive in downgrading borrowers in distress. Many mutual funds are forced to sell bonds falling to lower ratings. In the primary market, distressed borrowers are finding it difficult to sell securities to banks, which face greater regulation and have less interest in low rated bonds. The high yield muni bond market has buyers who specialize in those bonds and in 2012 the high yield index had a total return (income plus appreciation) of 15 percent. Distressed borrowers can get deals done, but at a cost two and three times that of high-grade issuers.

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